Jac Fitz-enz is chief executive officer of Human Capital Source, San Jose, California. Fitz-enz founded the Saratoga Institute, the first organization that collected data for providing benchmarks to effectively measure human capital. He is the author of more than 200 articles and eight books, including How to Measure Human Resource Management (McGraw-Hill, 2001), The ROI of Human Capital: Measuring the Economic Value of Employee Performance (AMACOM, 2000), and The 8 Practices of Exceptional Companies: How Great Organizations Make the Most of Their Human Assets (Amacom, 1995). His current work focuses on connecting human capital investments to financial, marketing, and operating outcomes. In this interview with HR Horizons, Fitz-enz discusses the people measures that are most important.

What is the most important thing for an organization to measure in terms of its human talent resources?

Fitz-enz: The single most important metric is turnover. However, simply recording the change in turnover rate is not enough. We need to look at secondary questions such as who is leaving, why, and at what point in their tenure. Also key is to look at mission-critical positions, since turnover there can cause major problems.

What is the best way to ensure stability of key talent in key roles?

Fitz-enz: Do an employee survey focused on engagement. Any evidence of disengagement is the beginning of turnover. A survey can also point to what you may need to do to remedy the situation. Often the three biggest root causes of disengagement relate to an employee's supervisor, pay, or lack of growth opportunities.

In what area or on what measurements do organizations place too much emphasis?

Fitz-enz: Transactions—how much did we do, what did it cost, how many people received training, and so forth. All these are cost metrics. In the beginning, we did this first to defend HR and show how much we did. Second, measuring transactions is easier than measuring strategic-level activity and results. Today, we need to look for effects of our work in terms of improvements in skill (test for it) and gains in productivity, quality, or service.

Put another way, we spend too much time measuring process and not enough time measuring the value of results.

What is the most important thing for leaders to keep in mind as they work to balance a strong focus on human assets and on institutional financial health?

Fitz-enz: Nothing happens without people. All other investments are passive assets: equipment, buildings, and so forth. These only depreciate. Only people appreciate through learning and experience.

And how can you measure your return on people investments?

Fitz-enz: Again, many get stuck using transaction metrics. How much on average does it cost to hire? On average, what does an employee's compensation and benefits package cost? These are ongoing measures of efficiency that are easy enough to track and adjust up or down depending on the type of job. But they remain transaction metrics until you look beyond costs to value. So, even if you spend $X or X percent per employee on training, what does that really mean? Why not spend 10 times that amount? What you need to do is to get to the value of that investment as it translates to greater productivity, reduced turnover, or improved customer service. The problem is that many organizations don't go beyond the pure cost measurements. And the problem of overemphasizing cost is that you become a cost center, not a value center. What you want to do is to measure value added as opposed to cost incurred.

What have you learned from your years of observing how to measure performance that has been contrary to what you had predicted at the outset?

Fitz-enz: I thought people would embrace sophisticated measurement much sooner than they did. It took about a dozen years from the time I introduced metrics in 1978 until a substantial number of people started measuring human capital. Then most got stuck in transaction metrics. Only within the past several years have a significant number of people started applying value and return-on-investment measures.

What force will have the biggest impact on human resource management in the next decade?

Fitz-enz: Outsourcing is changing the way organizations are structured. This changes communication patterns and power bases. It forces people to become program managers as opposed to doers, and this requires different skills. HR is gradually turning into a center for program management. Soon, the only thing left will be strategy, and if HR doesn't learn to be strategic, it will cease to exist.

As changing demographics bring forth a more diverse generation of leaders, how will these new leaders likely reshape the focus on human capital?

Fitz-enz: Education and the shift to service over manufacturing are changing how people think and what they value. Now the value is on discretionary thought as opposed to manual labor. Also, with the invasion of technology, leaders have to learn how to leverage technology through human skill and knowledge. This is quite different from teaching people how to use a stamping press or a cutting machine. As technology takes over more of the manual processes, people are now free to think more deeply about the effects and attributes of human behavior and how to leverage those as they consider making further investments in people.

How do you measure the value of technology-related investments versus people investments?

Fitz-enz: This depends on what the job is, since there are different outputs depending on whether you are a bank teller or a systems programmer. Bank tellers are concerned about quality. They don't want to make errors that cause accounts not to balance at the end of the day. A strong second is customer service, since you want the repeat business of those who may buy additional services. And third, you want to retain the customers that you do have.

With technology, we can automate the teller line. Because you still need to train that teller to use the new technology, there is a people investment. The goal is by investing in technology and in people to use the technology, you will see errors reduced. As a result, tellers can process more error-free transactions more quickly, plus spend more time serving and selling to the customer.

Where technology is involved, you first need to separate technology investments from people investments, but then you must bring those back together to gain a better understanding of the value added by combining these two different types of investments. To get the full picture, you also must measure value based on more than pure costs. In all cases, you can apply five basic measures to help assess the value of your investments. These include:

1. Cost—for instance, cost per unit of whatever you are producing.
2. Time—the cycle required to accomplish a task or produce a product unit.
3. Quantity—how much you produce with a given amount of input.
4. Quality—what the error rate is or how much rework is required.
5. Human response—how the customer feels about the product quality or service.

What do you envision as the next big challenge for successfully managing human capital and tapping human potential?

Fitz-enz: Predictability. We know how to measure the past through accounting, sales, and production variables. But now the advantage shifts to those who know how to anticipate the return on investments. We are already using leading indicators and measures of intangibles such as leadership, engagement, culture, and readiness and turning lagging information into visions of the future. We are doing this now using a new management system that is future-focused and integrated for greater effectiveness.

In one simple example, if we survey employees about the leadership of their company and they say they are not happy, then you have a high predictability rate that the company will experience significant employee disengagement and turnover, and likely a drop in customer service levels. All soft issues are what is at the heart of any people-centric organization and are ultimately what make a difference. You might equip an office with cutting-edge equipment and technology, but if employees don't like their supervisors or coworkers and are unhappy with what they are paid, then your technology investments are a wasted effort.

For instance, let's say your organization's turnover rate is 18 percent. That's a lagging indicator that tells you what the case was. The fundamental question to any lagging indicator is "So what?" You can't change the 18 percent because that is already history. But what is driving the 18 percent? When you take that lagging indicator to determine what the cause is, you turn this into a leading indicator through further analysis to find its cause. This goes back to the value of surveying employees to determine causes of disengagement: why do employees leave, at what point (6 months or 6 years or 10 years), what was wrong when they left, where did they go, what outside inducement such as compensation caused them to leave, and so forth. This predictive model measures these key leading indicators to allow leaders to circumvent problematic trends and make necessary investments to change course or to invest further in positive outcomes.

Karla Hignite, principal of KH Communication, is editor of NACUBO's HR Horizons. E-mail: karlahignite@msn.com.